When I first heard of the ‘Halloween effect’ in a trading context, I dreamt up day traders to trade spider cookies for doughnut hole eyeballs and mummy pretzels on the trading floor.
Sadly, the Halloween effect is not actually as delicious, but it’s still worth getting to know! The Halloween effect is a market-timing strategy, which various industry experts have thoroughly studied.
The Halloween effect comes hand-in-hand with the old Wall Street adage, “Sell in May and go away”.
Sven Bouman and Ben Jacobsen were the first to study and document a robust seasonal effect on returns of stocks and indices during the November to April half-period. After examining data from global stock markets, they found that stocks offer better returns during this ‘winter’ period.
Since then, any further studies have just reaffirmed their initial argument, i.e. the persistent effect of this seasonal anomaly across most stock markets.
“Sell in May and go away.”
While researchers identified this significant seasonality to stock markets, they failed to explain what causes the Halloween indicator.
Returns in November through April, on average, are significantly higher (5-10%) than those in May through October. But why do markets tend to perform better in the November to April months?
Some experts indicate the impact of summer holidays on market liquidity. Others suggest that this phenomenon can relate to the negative average returns during the ‘summer period’ rather than the superior performance of markets during the winter period.
Is the Halloween mystery spirit behind this consistent and persistent market-timing strategy? No one really knows.
Halloween stock market lingo
Do you know that the said Halloween spirit is all around Wall Street all year long? It lives in the Wall Street lingo!
We’ll share with you two of the spookiest terms used in stock market trading to add to your trading jargon, along with the Halloween effect.
Dead cat bounce: Unlike the bad luck accompanying a black cat, it might mean something good when you encounter a dead cat bounce. A dead cat bounce in stocks means a momentary, brief rise in a declining stock or index price.
Witching Hours: Double, triple or quadruple witching happens when markets collide and cause heavy trading volumes. Four times a year, groups of financial contracts expire on the same day and the same time. Witching happens in the final trading hour of stock market sessions on the third Friday of March, June, September and December.
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